Additional Medicare Tax: What this Means for Employers and Employees
The Additional Medicare Tax has been in effect for almost a year, and with tax season approaching, employers and employees should adhere to these rules to ensure a smooth 2013 tax filing. The tax is a provision of the Affordable Care Act, one to help offset the cost of providing health insurance to millions of Americans.
As listed below, an individual is liable for the Additional Medicare Tax if their wages, compensation, or self-employment income exceeds the threshold for the individual’s filing status. The tax, at a rate of 0.9 percent (an increase from 1.45 percent to 2.35 percent), applies to income that exceeds the threshold received after December 31, 2012. All Railroad Retirement Tax Act (RRTA) compensation that is currently subject to Medicare tax is subject to the Additional Medicare Tax if it is paid in excess of the applicable threshold for an individual’s filing status.
Married filing jointly
Married filing separately
Head of household (with qualifying person)
Qualifying widow(er) with dependent child
This tax is calculated based on total wages from all jobs. Employers are required to withhold the Additional Medicare Tax only if they pay more than $200,000 in Medicare wages to an employee during the year, and should begin to do so with the first paycheck that exceeds this threshold. An employee may still be liable for the tax even if their wages alone don’t exceed $200,000. For example, if married and filing jointly and the combined income exceeds $250,000, the employee is responsible for paying the tax.
In determining whether wages exceed $200,000, an employer does not take into account the employee's filing status or other wages or compensation that may impact the employee's liability for the tax. Employers will withhold the 0.9 percent just as they would withhold Medicare taxes and then remit them to the IRS. Employers are not required to notify an employee when they begin withholding the Additional Medicare Tax. It’s important to note that liability falls on the employer if they fail to withhold the tax, and are subject to applicable penalties.
Under the proposed regulations:
- Employees may ask their employers to withhold additional income tax on Form W-4 if they believe they will be subject to the Additional Medicare Tax, but they cannot designate a withheld amount specifically for the Additional Medicare Tax; and
- An employer cannot honor an employee's request to cease withholding the Additional Medicare Tax even if the employee will not owe the tax because of his filing status.
If there is not enough withheld, an employee may adjust the withholding by making estimated tax payments or completing a Form W-4. The proposed regulations do provide a process by which employers and employees may claim refunds of overpayments of the Additional Medicare Tax by filing Form 1040X, Amended U.S. Individual Income Tax Return. The threshold amounts of self-employment income are reduced by any wages the individual earns that are subject to Federal Insurance Contributions Act (FICA).
The IRS has FAQs to help educate employers and employees on the Additional Medicare Tax, but as tax season approaches employers should consider working with a provider who can help ensure that they are in compliance with these regulations. Professionals can offer ongoing guidance as well as assistance in establishing which employees will exceed the threshold, and accurately withhold the correct amount for the tax once workers are identified.